P-Note directive steadies funds

Analysts feel the decision of the Securities and Exchange Board of India is likely to impact market volumes, reports Arun Kumar.

The Securities and Exchange Board of India’s decision asking foreign institutional investors (FIIs) to curb derivatives linked to participatory notes (P-Notes) is along expected lines and as per the draft paper that the regulator had circulated.

Analysts feel that the clarity shown by the regulator in registering the institutions and defining the ground rules may bolster investor sentiments that could lead to the influx of a large number of FIIs into India.

However, the decision asking foreign institutional investors (FIIs) to wind up participatory notes (P-Notes) for investing in derivatives within 18 months will adversely affect the volumes in future market and even the cash market is likely to witness a drop in volumes.

There is also a tight leash on shadowy hedge funds that play in global markets outside regulatory purview anywhere.

Stock futures, which currently have an open position of more than Rs 100,000 crore, is largely dominated by P-Notes and are currently used as hedging instruments to limit risk in cash markets.

In fact, apprehending the ban, futures market witnessed 91 per cent roll-over on Thursday, the settlement day for October. This clearly indicates that FIIs have created a large position in P-Notes, which they need to wind up over the next 18 months.

In line with the market expectation, SEBI fixed October 25 as the last recording date for P-Notes. Even for the cash market, no FII can issue fresh P-Notes in case the size of P-Notes is more than 40 per cent of their assets under command (AUC).

Amitabh Chakrabarty, President Equities, Religare Securities said that the market has already discounted the decision.

"The clarity issued by the SEBI in term of dates for AUC and P-Notes would be positive for the market. Going forward, the regulator has made it clear that it wants investment in transparent ways after 2009 and we are moving in that direction," he added.

SEBI is expected to be lenient in registering FIIs and give elbow room for transition from P-Notes.

But 'hot money' hedge funds are under check. "This is a grey area and has the potential to drag the market," said Chakrabarty.

Analysts feel that the volume decline on account of winding up of P-Notes is expected to be marginally replenished by the fresh lot of registered FIIs.

"The fundamental issue is that India is a growth story and provides huge investment opportunities," said the head of a leading private equity fund.